Tax Avoidance: Consequence or Purpose?
Tax mitigation and tax avoidance are not usually called into question by HM Revenue and Customs, tax evasion is, of course, a different thing altogether. However, a tax mitigation/avoidance scheme may not necessarily escape HMRC scrutiny. Company directors could also face potential claims for breaches of corporate duty in circumstances where there is question mark over their tax affairs.
Fortunately, in a recent first-of-its-kind case it was accepted that a tax mitigation scheme was legally acceptable because its main purpose was to keep a management team together, rather than to hide or camouflage directors’ remuneration. So how did the judge differentiate between this acceptable tax avoidance and deliberate evasion; and what can businesses take from this?
What happened?
The liquidator of a company claimed that its seven directors were involved in a scheme that avoided substantial sums in tax and National Insurance over an eight-year period, financially benefitting themselves instead. He brought proceedings against the directors for an amount in the region of £38m and claimed (among other things) breach of directors’ duties under s172 Companies Act 2006; and fraudulent trading under s423 Insolvency Act 1986.
Importantly, there were no allegations of fraud or disguised distribution on the part of the directors (four of which settled the claims ahead of the trial). The remaining directors resisted the claim arguing that they had taken expert advice from BDO Stoy Hayward before entering the scheme; and that they had always reasonably and responsibly relied on that advice. They said that it was incentivise the management team and to keep it together – and was implemented with the shareholders’ consent.
The court rejected the liquidator’s claims. The directors had been entitled to rely on BDO’s professional advice that the tax scheme was likely to be successful. In the proper discharge of their duties, the directors had the wisdom to take this top-level advice throughout; and had acted in good faith.
As for the fraudulent trading allegation, it’s important to understand that for a s423 offence, there must be the requisite purpose - put simply, the purpose to transfer money away from HMRC and into the directors’ hands which would otherwise be payable in PAYE and NICs.
But ‘purpose’ is not the same as ‘consequence’. Here, the consequence of the scheme was that the sums of money were put beyond of the creditor (HMRC). But that was not its ‘purpose’ – the purpose was to pay monies pursuant to a legitimate scheme on which professional advice had been taken at all stages.
The importance of specialist advice
The outcome for the directors could well have been different had it not been for the clear and consistent advice from BDO and that fact it was relied on. The judge made clear that the directors were entitled to take BDO’s “particular and cumulative and consistent” at face value.
The decision is thus an important reminder to companies and their directors that when considering entering into a form of tax avoidance or mitigation scheme, it is vital that expert advice is sought as to its purpose, legitimacy, practical working and its implications – and act on it. The consequence of such a scheme may be a costly one to HMRC – but that does not necessarily mean it is unjustifiable or, indeed, unlawful.
1Re Marylebone Warwick Balfour Management LTD [2022] EWHC 784 (Ch)